Agricultural Infrastructure To Come Into Focus

Agriculture-related infrastructure investment will come into focus in Australia over the next 10 years and beyond as robust growth in the country's agricultural sector runs up against limited capacity in the existing transport network.

Agriculture will become an increasingly important driver of growth in Australia's infrastructure sector over the next 10 years, as rising production and exports run up against capacity and logistics constraints in existing transport networks. Although agriculture-related projects are unlikely to approach the scale of mining and real estate projects that have historically dominated the Australian construction industry, we note that the long-term outlook for agricultural commodities is more positive than for minerals or housing. Our Commodities Team forecasts that wheat prices will trend upward 35% by 2021, while iron ore prices will decline by 27% over the same period. They also forecasts wheat production in Australia to grow at an annual average of 4.2% between 2016/17 and 2020/21, as exports to Asia expand ( see our Agribusiness coverage 'Bright Export Outlook For Australia But Growing Challenges', October 8 2015).

Agri Outlook Positive

Global - Forecast Wheat and Iron Ore Prices

e/f = BMI estimate/forecast. Source: Bloomberg, BMI

Existing Infrastructure Inadequate

Agricultural producers are already struggling with the inadequacies of existing road and rail networks, which have driven up transport costs and threatens Australian agriculture's competitiveness with producers elsewhere in the world. Although Australia has an extensive network of long-distance freight highways and railways, many of them are ill-suited for the agricultural sector, whose production is much more decentralised than in the mining sector. Perishable agricultural products are particularly susceptible to delays caused by bottlenecks on roads and railways - the latter caused by weight and speed restrictions - which also contribute to inefficiencies at exporting ports. The Australian Export Grains Innovation Centre estimates supply chain costs of wheat travelling 200km from farm to port amount to AUD60-75/tonne (USD54-67/tonne), or around 30% of production costs and 23% of the average Australian wheat price. According to the National Australia Bank, AUD3.9bn is needed to expand and update the country's grain storage/handling and port network.

Northern Australia will come into focus for many agriculture-related infrastructure investments, as its ports lie closer to demand markets in Asia and thus provide a greater time advantage compared to existing ports in the southwestern and southeastern parts of the country. Agricultural production in Northern Australia has also been rising quickly owing to the region's low level of development and historic underutilisation of land.

Agriculture Across The Country

Australia - Major Planned Agriculture Infrastructure Projects

Source: Australia Agricultural Competitiveness White Paper

Government Focus Slowly Growing

The Australian federal and state governments' current focus on developing agriculture-related infrastructure is limited but growing in scope. The Victoria Government's AUD200mn Agriculture Infrastructure and Jobs Fund (AIJF) includes a AUD150mn 'Major Capital Works' programme that provides funding to projects that remove bottlenecks, improve rail capacity and enhance road efficiency - though the small scale of the fund means that high-value needs will remain unaddressed. The federal government's AUD42mn Infrastructure Investment Program includes several freight highway projects aimed at improving links between agricultural regions and consumption and export hubs:

Upgrades to the Great Northern Highway, the Bruce Highway, the Warrego Highway, the Price Highway and the Midland Highway will improve safety and capacity along key freight transport corridors.

Upgrades to roads in the Northern Territory will improve connections between producers, refiners and main transport networks.

The construction of the Perth Freight Link and the Toowoomba Second Range Crossing will alleviate bottlenecks between existing highways and ports.

While current development initiatives are focusing on roads, we believe that freight rail infrastructure will also come into focus over the next 10 years as production and exports continue to increase. Agriculture-oriented railway infrastructure is essential for the long-term growth of Australian agricultural exports, especially as the government forecasts agri-food exports to increase by 140% by 2050. As Australia works to capitalise on Asia's food demand boom, investment in more-efficient railways infrastructure will become more financially appealing and more logistically necessary.

Public And Private Coordination Critical

Given the fragmented landscape of Australia's agricultural sector, coordination between public bodies and private companies will be critical to ensure that infrastructure projects are properly planned and implemented. In particular, state governments - and associated state-owned enterprises - which are in charge of investment and regulation of transport networks will have to work effectively with independent producers and major transport, storage and handling firms such as GrainCorp and CBH Group. Currently, common disputes between transporters and government agencies include the lack of rail capacity at key loading and unloading points and the unpredictability of line closures and maintenance schedules stemming from the existence of overlapping government bodies and corporations responsible for managing the rail network.